HR 25 - FairTax introduced in March - What ya think?

[landrun]

Senator Saxby Chambliss introduced a Fair Tax bill on the floor again last week. http://www.walb.com/Global/story.asp?S=6323899

Fair Tax Site: http://www.fairtax.org/site/PageServer

Everything I read about it makes me wonder why someone would oppose it.

Here is my understanding of the bill:

-the law creating the federal income tax would be repealed - both for individuals and for businesses.
-A constitutional amendment repealing the 16th Amendment (gave permission for an income tax) would be sent to the states for ratification. (so that after they pass the flat tax congress couldn't come back a few years down the road and initiate another income tax to quickly increase our tax rates again)
-All laws requiring payroll taxes to fund Social Security and Medicare would be repealed but government funding for them would remain at the same present levels - no changes would be made to Social Security / Medicare other than the funding would be coming from the flat tax rather than income tax
-A national sales tax of 23% would be instituted on the sale of all goods and services at the retail level replacing the income tax.
- no family would pay sales taxes on the basic necessities of life.
Here's how this provision would work:
the basic necessities cost is set at the determined poverty level depending on family size. Then, each month each family (head of house hold) will receive a credit (check or an electronic credit to their bank account) in an amount equal to the sales tax they would pay on the basic necessities per their family size. ( this last provision would address the concerns that the poor wouldn't be able to afford the taxes because the poor -and everyone else- wouldn't have to pay taxes for basic necessities.)

My questions is, what is the other side of the story? There are always 2 sides and another opinion. So, why would someone oppose this?
Also, there is probably a difference 'interpretation' of the bill. But I'd like to know why something that sounds so reasonable can't seem to get any momentum in the house.

[Vaevictis]

One of the things that worries me about high sales taxes instead of income taxes is the way they affect production costs.

In the case of income taxes, you get taxed in proportion to your profit; in the case of sales taxes, you get taxed in proportion to your costs.

Low margin industries might find that their taxes would be increased significantly by this tax scheme.

[homerSimpsonsBrain]

One possible unintended consequence: What happens when people say "23 percent sales tax!! I dont think I really need that new <car, house, stereo, etc>". The US consumer is (reportedly) what drives the world economy.

[yermom]

yeah, and the secondary market then becomes very interesting

i think it will be great for the consumer, but pretty bad for big business

imagine buying used stuff on eBay for more than retail because it's cheaper than buying it new with the tax

[landrun]

One of the things that worries me about high sales taxes instead of income taxes is the way they affect production costs.

In the case of income taxes, you get taxed in proportion to your profit; in the case of sales taxes, you get taxed in proportion to your costs.

Low margin industries might find that their taxes would be increased significantly by this tax scheme.

Okay. I'm not sure I understand what you're saying here. But I think you're saying if they pay 23% on what they buy (figured into their costs) that it could increase a small business's tax? But, look at this link where they address questions about the tax. Their site says that business purchases are NOT taxable - at all. (did I read that right?)
http://www.fairtax.org/site/PageServer?pagename=about_faq_answers#48

[Vaevictis]

No, you read it right. I just missed it. The error is mine.

[landrun]

One possible unintended consequence: What happens when people say "23 percent sales tax!! I dont think I really need that new <car, house, stereo, etc>". The US consumer is (reportedly) what drives the world economy.


One of the things that worries me about high sales taxes instead of income taxes is the way they affect production costs.

In the case of income taxes, you get taxed in proportion to your profit; in the case of sales taxes, you get taxed in proportion to your costs.

Low margin industries might find that their taxes would be increased significantly by this tax scheme.

Very good points that I didn't think about.

One thing I read while looking over this is that because of all the embedded taxes that are in a product by the time it makes it to the retail shelf, that the average retail costs will go down 20%. The explanation is that there are additional taxes at each level, manufacturing, shipping, retail etc...
With those taxes removed, the final price of most products will drop 20%.

So, they say, that it would almost be a wash when compared to the price we currently pay for most items in spite of the 23% tax rate.

[Ike]

Okay. I'm not sure I understand what you're saying here. But I think you're saying if they pay 23% on what they buy (figured into their costs) that it could increase a small business's tax? But, look at this link where they address questions about the tax. Their site says that business purchases are NOT taxable - at all. (did I read that right?)
http://www.fairtax.org/site/PageServer?pagename=about_faq_answers#48

so then what's to prevent me from declaring myself to be a small business?

[Vaevictis]

With those taxes removed, the final price of most products will drop 20%.

That's fine, but that just means that the taxes will need to be shifted to somewhere else, right?

To where are they being shifted? Unless they get shifted nowhere, in which case this is just a tax cut scheme -- and in which case, does it really matter how you cut taxes? Just cut them.

[yermom]

so then what's to prevent me from declaring myself to be a small business?


what is there now?

[landrun]

so then what's to prevent me from declaring myself to be a small business?

Their answer is in questions # 48



Since business purchases are not taxable, how does the FairTax keep individuals from pretending to have a business so they can buy things tax free?

The FairTax has several features that make it difficult and very risky for persons to have a scam business in order to purchase items tax free. First, in order for any person to purchase items tax free for business purposes, the business has to be a registered seller and possess a registered seller certificate issued by the state sales tax authority. Registered sellers are expected to file monthly or quarterly sales tax returns with the state (depending on sales volume). The certificate enables the business to purchase tax free from wholesale vendors, but the vendor must retain a copy of the registration certificate to justify not having collected tax on the sale. When a business purchases items for business use from a retail vendor, they have to pay the tax on the purchase and take a credit against the tax due on their monthly sales tax return. They must keep invoices/receipts to document what they purchased and the amount of the purchase. They might also make note of the purpose of the purchase on the invoice.

Also, as registered sellers, they are subject to the possibility of being audited by the state. During such an audit they will have to produce the invoices for all the “business purchases” that they did not pay sales tax on, and will have to be able to show that they were bona fide business expenses. If they cannot prove this, then they will have to pay the taxes that should have been paid when the items were purchased, plus interest and penalties. The probability of being audited will be much greater than it is under the current system with its over 140 million tax filers. Under the FairTax, there will be less than 20 million businesses that will be filing sales tax returns and thus subject to the possibility of being audited. Thus the probability of tax cheats getting caught will be much greater than it is today, making tax evasion riskier than it is today. Additionally, while the FairTax has much stronger taxpayer rights than does the current tax system, the FairTax legislation provides for a number of fines and penalties for noncompliance. It also authorizes a mechanism for reporting tax cheats and obtaining a reward. An example would be 1-800-TAX-CHET.

Another potential scam would be to have a “fake” family business in order to buy things for family members tax free. The FairTax has a specific provision to prevent this. Although it does not prohibit businesses from providing taxable property or services as gifts, prizes, rewards or as remuneration for employment, the gift, reward, etc. is considered to be the conversion of property or services from business use to personal use and is therefore taxable. Likewise, there is a similar provision to prevent abuse of employee discounts. Under the FairTax, employer-provided employee discounts over 20 percent are taxable. The term “employee discount” means an employer’s offer of taxable property or services for sale to its employees or their families for less than the offer of such taxable property or services to the general public. If the employee discount amount exceeds 20 percent of the price to the general public, then the sale of such taxable property or services by the employer to the employee is considered the conversion of property or services to personal use and is subject to tax. The taxable amount is the amount by which the discount exceeds 20 percent of the price to the general public.

[landrun]

That's fine, but that just means that the taxes will need to be shifted to somewhere else, right?

Exactly. Its being moved to a sales tax.
I like the idea because as a consumer you can cut your own taxes by being frugal if you wish to.



To where are they being shifted? Unless they get shifted nowhere, in which case this is just a tax cut scheme -- and in which case, does it really matter how you cut taxes? Just cut them.

So later someone else can raise them? then cut them, then raise them...
And every year congress can fight about them?

I think the point of the tax is that there's no longer the hidden taxes while your product makes it to the retail floor and the government can't hide the employment tax we all pay via our employers and never even see. (and many aren't even aware of) Everything is out in the open.

[mdklatt]

the law creating the federal income tax would be repealed - both for individuals and for businesses

You also said that business purchases would not be subject to the sales tax. So businesses wouldn't be taxed at all anymore? How is that fair?



A national sales tax of 23% would be instituted on the sale of all goods and services at the retail level replacing the income tax.


Wouldn't this make the government's revenue stream unstable? Is the government going to have to limp along through October and November until the holiday shopping season kicks in?



- no family would pay sales taxes on the basic necessities of life.
Here's how this provision would work:
the basic necessities cost is set at the determined poverty level depending on family size. Then, each month each family (head of house hold) will receive a credit (check or an electronic credit to their bank account) in an amount equal to the sales tax they would pay on the basic necessities per their family size.


This seems ridiculously complicated. Why not just exempt things like food and clothing up to a certain amount per item? For example, a loaf of bread is exempt up to $1.25, and a pair of shoes is exempt up to $30.

This whole plan seems complicated, regressive, and susceptible to fraud--even more so than the income tax.

[Hamhock]

as it is now, to the extent a business uses something in production, then collects sales tax later, when the final product is sold, they don't pay sales tax on the component ingredient.

[homerSimpsonsBrain]

Very good points that I didn't think about.

One thing I read while looking over this is that because of all the embedded taxes that are in a product by the time it makes it to the retail shelf, that the average retail costs will go down 20%. The explanation is that there are additional taxes at each level, manufacturing, shipping, retail etc...
With those taxes removed, the final price of most products will drop 20%.

So, they say, that it would almost be a wash when compared to the price we currently pay for most items in spite of the 23% tax rate.


Even with the price dropping 20% or so, the policy encourages saving rather than spending. Money I save wont be taxed. Today I pay taxes on interest I earn from savings, etc. Unless the "plain English" listed on that site is wrong...



There are no exemptions under the FairTax, meaning that no lobbyist, corporation, or individual can obtain tax advantages that are not available to the general public. Also, everyone pays the same rate, but those who spend more pay more total taxes than those who spend less.


I think on the surface thats a good thing. I'm just wondering about the short term consequences of that kind of radical change to the economy.

[OUstudent4life]

My only thought is that this would place a major burden on people like me...students in college with a fixed income...and maybe even anyone on a currently low-level fixed income.

I get all of my taxes back. Every year. My wage wouldn't increase, because I'm still getting everything back. But now it would cost more for me to do pretty much anything but live with the "basic necessities."

I can see how it would be pretty much the same for anyone on a fixed low-level income.

[jk the sooner fan]

yeah, this would really hurt lower income folks.......it would make major purchases difficult and alot of them rely on that refund they get every year

[landrun]

mdklatt - Their claim is that right now, the rich do pay taxes. But business do NOT - won't tomorrow, and never will. There is no fundamental change in that with the fair tax system.

As for the monthly tax credit, to me, it seems very simple, you get X amount if you're single, X if you're a family of 2, X if you're a family of 3 etc... It certainly is MUCH less complicated than what we have now.

As far as exemptions I had the exact same objection, only I wanted to exempt all groceries, gas and housing. But their argument is that when you start offering exemptions, you invite lobbyists and the politicians sell their souls and in the end the average person suffers. No exemptions. A 'fair' credit each month depending on the size of your family is the fairest/safest way to keep the dirty politician's hands off the money.

That was their argument. After I thought about it some, I see their point and think it is valid.



Even with the price dropping 20% or so, the policy encourages saving rather than spending. Money I save wont be taxed. Today I pay taxes on interest I earn from savings, etc. Unless the "plain English" listed on that site is wrong...


Haven't thought about that and it seems right. That's probably the best argument I've heard against the fair tax yet. I would certainly encourage being frugal and not spending - which would hurt the economy.



I get all of my taxes back. Every year. My wage wouldn't increase, because I'm still getting everything back. But now it would cost more for me to do pretty much anything but live with the "basic necessities."

I can see how it would be pretty much the same for anyone on a fixed low-level income.

That is a good argument too. You'd get a credit for food etc... but you'd have to pay 23% on all the fun stuff. The questions is (and I haven't see any data on this) would the fact that you get to keep 100% of your check (and maybe more seeing how the employers would no longer have to pay 1/2 of your FICA) offset the 23% you pay for what you enjoy? That's the rub and I can't tell if we come out better or worse.

[landrun]

yeah, this would really hurt lower income folks.......it would make major purchases difficult and alot of them rely on that refund they get every year

That's not a good argument though. They're not losing their refund. In fact, they're getting it before they normally do. They get it every month now rather than once when they file their taxes.

That would not be an issue for low income people. It would be an issue for people who haven't learned financial self discipline yet though. They'll have more money, not less. And they'll have it consistently.

The question again is if the fact that they get to keep all of their money offset the 23% retail tax.

[OUstudent4life]

That is a good argument too. You'd get a credit for food etc... but you'd have to pay 23% on all the fun stuff. The questions is (and I haven't see any data on this) would the fact that you get to keep 100% of your check (and maybe more seeing how the employers would no longer have to pay 1/2 of your FICA) offset the 23% you pay for what you enjoy? That's the rub and I can't tell if we come out better or worse.


Can you imagine a 23% tax on your textbooks????? :D I'm already raked over the coals for those, and I'm betting they're not "necessities."

Another group of people that would be MAJORLY hurt is another one of my "hats," namely a "professional" student (ie - med, dent, nursing, pharm, law, etc). We (we as in me and my wife) live on loans that aren't taxed at all...and in fact, will be able to deduct the interest of in the future...but now we would carry the extra burden of higher taxes on things we already buy. We'd get screeeeewed, both on that deduction in the future, and in the little bit of money we've been putting away in a Roth IRA for the future.

We're going to need that deduction. Our loan repayment when my wife is done with residency will be on the order of $50,000/year, at the least.

And can you imagine the burden on those students if the loan amount and limit (yes, there is a federal education loan limit, my wife hit it) has to be raised because the "cost of living" has been raised?

[OUstudent4life]

That's not a good argument though. They're not losing their refund. In fact, they're getting it before they normally do. They get it every month now rather than once when they file their taxes.

That would not be an issue for low income people. It would be an issue for people who haven't learned financial self discipline yet though. They'll have more money, not less. And they'll have it consistently.

The question again is if the fact that they get to keep all of their money offset the 23% retail tax.

We'd have less. We'd get the same amount of money we have now, but things we buy would cost more. There's no "more money" for us to get, because we already get it all.

[landrun]

Right, but you're assuming you'd be paying 23% more than you're paying now.

You may be. But the fair tax crowd points to the 20% of hidden taxes in products we buy now that we don't realize we're paying. So, if they're right, you're books would be about the same they are right now. And you'd have more money to buy them with too. Which brings me back to the thought of a 23% tax means we'll all be more frugal. That may not be true, especially if there is a cut in retail prices because of the fair tax.

Keep posting your thoughts though. I'm just sort of thinking out loud trying to figure this out. :)

[landrun]

Best case scenario would be that the 23% tax is offset by a 20% cut in retail prices due to the fact that income tax is gone. We then have more money and prices are about the same.

Worst case scenario is there is no drop in prices and retail taxes go up 23%. For the poor who currently pay no taxes that would be an issue. For everyone is it may or may not be depending on if the extra cash you have offset 23% tax. I don't like the uncertainty of it right now. :(

[OUstudent4life]

...but in reality, I'm not going to have more money. I wouldn't get a "raise," because my money comes from two places: the government (via a grant from the ADA for my research) who won't be making more money, and student loans, which aren't taxed in the first place, so my income from that can now buy less.

I agree on the "frugal" thing, though. It's sad when the average person is a bazillion dollars in debt on credit cards because they're buying things they can't afford. The flip-side of that is, though, that I'm already pretty frugal, having to live cheap, and get all of the money I give to the government back already. I'd have to live cheaper, and, well, I don't wanna :D.

[OUstudent4life]

I also don't see why retail would automatically cut prices. They'd see the chance for increased revenue, and they wouldn't be to blame for new higher prices, the government would, 'cause of the tax. I'm just guessing there'd be claims about how they have to increase wages for employees to this or that level, so they have to keep their prices nearly the same, it's not their fault, it's that new damn tax :D.

[mdklatt]

But the fair tax crowd points to the 20% of hidden taxes in products we buy now that we don't realize we're paying. So, if they're right, you're books would be about the same they are right now. And you'd have more money to buy them with too.

The same or lower costs for stuff, plus more money because we're not paying income taxes? That sounds too good to be true.


If there's no more income tax for businesses, and they don't pay the VAT, how are they taxed? Not at all?

[Ike]

mdklatt - Their claim is that right now, the rich do pay taxes. But business do NOT - won't tomorrow, and never will. There is no fundamental change in that with the fair tax system.

As for the monthly tax credit, to me, it seems very simple, you get X amount if you're single, X if you're a family of 2, X if you're a family of 3 etc... It certainly is MUCH less complicated than what we have now.

As far as exemptions I had the exact same objection, only I wanted to exempt all groceries, gas and housing. But their argument is that when you start offering exemptions, you invite lobbyists and the politicians sell their souls and in the end the average person suffers. No exemptions. A 'fair' credit each month depending on the size of your family is the fairest/safest way to keep the dirty politician's hands off the money.

That was their argument. After I thought about it some, I see their point and think it is valid.



Haven't thought about that and it seems right. That's probably the best argument I've heard against the fair tax yet. I would certainly encourage being frugal and not spending - which would hurt the economy.


That is a good argument too. You'd get a credit for food etc... but you'd have to pay 23% on all the fun stuff. The questions is (and I haven't see any data on this) would the fact that you get to keep 100% of your check (and maybe more seeing how the employers would no longer have to pay 1/2 of your FICA) offset the 23% you pay for what you enjoy? That's the rub and I can't tell if we come out better or worse.

The problem is that theres really no reliable way to determine who comes off better worse. There will certainly be winners and there will certainly be losers. If such a bill ever gets serious consideration, There will probably be a raft of economists who will predict "people in this group win and people in this group lose"....and every one of them will contradict each other, because there are a number of cascading and cyclical effects to consider, and nobody will know who has considered all of them correctly.

[OUstudent4life]

My question is, along with what mdklatt's saying, is...if stuff costs less, and we get more money, where's that money coming from/going? There can't just be fresh money to use...the only money I can see in saving is at the federal level, 'cause there's less people (IRS) to pay, and less red tape and the like that sucks up money. Where's all the new money going to come from, or does it all just re-balance out in the end to where we are now?

If causing people to be more frugal is the end result, i.e. not spending as much because they can't...I take that to mean that we'll actually have less money to spend (or less compared to the current value of the dollar, since things will look like they cost more, 'cause there's the new tax.)

I'm so confused. High school macro/micro economics class..taught by a coach...14 years ago...brain...failing...too much alcohol consumed between now and then...

[mdklatt]

mdklatt - Their claim is that right now, the rich do pay taxes. But business do NOT - won't tomorrow, and never will. There is no fundamental change in that with the fair tax system.


I didn't see this before; ignore my question a few post up.

I see what they're saying, that businesses just pass on their taxes to the consumer, but something just doesn't seem right. Regardless of who is actually paying corporate income tax, somebody is paying it. If that goes away, how is the difference going to be made up? I don't see how we can lower the cost of everything--including our tax burden--while maintaining constant revenue for the government. See my "too good to be true" comment earlier.




As for the monthly tax credit, to me, it seems very simple, you get X amount if you're single, X if you're a family of 2, X if you're a family of 3 etc... It certainly is MUCH less complicated than what we have now.


The main complication is making it monthly. Imagine the expense of sending out all those checks each month. A lot of people would use direct deposit, but a lot of people won't. The whole process just seems backasswards. Instead of giving me a refund every month, how about not charging me as much in the first place?


How is the tax going to be collected on non-retail purchases (eBay, person-to-person, etc.)?

[Vaevictis]

Exactly. Its being moved to a sales tax.
I like the idea because as a consumer you can cut your own taxes by being frugal if you wish to.

I think you're missing the point. One of the things is, if I'm getting what you're saying correctly, is that we're going to do away with both the income tax AND the 20% in hidden taxes in any purchase. But you're going to put 23% on every purchase.

Now, I'm just doing eyeball math, which is notoriously prone to error, but what you're saying is that the 3% above the 20% is going to make up for all of the lost income taxes the government would be giving up? I don't know that I believe that.

[Ike]

I think you're missing the point. One of the things is, if I'm getting what you're saying correctly, is that we're going to do away with both the income tax AND the 20% in hidden taxes in any purchase. But you're going to put 23% on every purchase.

Now, I'm just doing eyeball math, which is notoriously prone to error, but what you're saying is that the 3% above the 20% is going to make up for all of the lost income taxes the government would be giving up? I don't know that I believe that.


So if prices drop due to the ellimination of 20% hidden tax, and then go up by 23%, that actually makes the final cost of the item 98.4% of the original price of an item. (0.8*1.23=0.984)...in other words, prices would technically drop if this was the case.

This would seem to mean, from my point of view that the government would only bring in 98.4% of what they currently make in those hidden business taxes that were just eliminated....and 0% of the income taxes that were just eliminated....unless people suddenly start buying up a whole lot more **** than they were buying before...but I don't think that consumer spending would go up that significantly.

[sooner_born_1960]

Damn you, Ike and your fancy math skills. ;)

[mdklatt]

This would seem to mean, from my point of view that the government would only bring in 98.4% of what they currently make in those hidden business taxes that were just eliminated....and 0% of the income taxes that were just eliminated....unless people suddenly start buying up a whole lot more **** than they were buying before...but I don't think that consumer spending would go up that significantly.

I'm guessing that the originators of this idea worship at the alter of Reagonomics.

[landrun]

I'm guessing that the originators of this idea worship at the alter of Reagonomics.

That's what its beginning to seem to me too.

With a 20% drop in hidden taxes, and a 23% tax rate, they'd collect 3% more than they are now at the point of sale. To recover for the lost revenue from everyone else's checks, they're saying the growing economy would actually bring more in for the federal government than income taxes are now. My uneducated non-economic minded first thought is, "that's one heck of a fast, huge growing economy!" As you have said. Sounds too good to be true. :(

They have their experts on this. I have no doubt someone opposing this tax for whatever reason will have their experts too.

[SicEmBaylor]

It'll neither have a hearing nor ever make it out of committee.

[mdklatt]

With a 20% drop in hidden taxes, and a 23% tax rate, they'd collect 3% more than they are now at the point of sale.


See Ike's math--they'd actually collect less, assuming an equal level of spending.



They have their experts on this. I have no doubt someone opposing this tax for whatever reason will have their experts too.

The problem with economics is that experts can be saying opposite things and both of them are right. Or wrong, depending on your point of view.

[SicEmBaylor]

Can you imagine a 23% tax on your textbooks????? :D I'm already raked over the coals for those, and I'm betting they're not "necessities."

Texas is coming pretty close to eliminating the tax on college text books for specified terms throughout the year (probably the first couple of weeks before each new semester).

[Frozen Sooner]

So if prices drop due to the ellimination of 20% hidden tax, and then go up by 23%, that actually makes the final cost of the item 98.4% of the original price of an item. (0.8*1.23=0.984)...in other words, prices would technically drop if this was the case.

This would seem to mean, from my point of view that the government would only bring in 98.4% of what they currently make in those hidden business taxes that were just eliminated....and 0% of the income taxes that were just eliminated....unless people suddenly start buying up a whole lot more **** than they were buying before...but I don't think that consumer spending would go up that significantly.

You're ignoring the efficiency effects of being able to seriously cut back on IRS enforcement, collection, and auditing staff.

But yeah.

[mdklatt]

You're ignoring the efficiency effects of being able to seriously cut back on IRS enforcement, collection, and auditing staff.



Is that a significant portion of the federal budget?

[SicEmBaylor]

Is that a significant portion of the federal budget?

I think it's something like 12 billion a year.

[mdklatt]

I think it's something like 12 billion a year.

In other words, no. :D

[tommieharris91]

So if prices drop due to the ellimination of 20% hidden tax, and then go up by 23%, that actually makes the final cost of the item 98.4% of the original price of an item. (0.8*1.23=0.984)...in other words, prices would technically drop if this was the case.

This would seem to mean, from my point of view that the government would only bring in 98.4% of what they currently make in those hidden business taxes that were just eliminated....and 0% of the income taxes that were just eliminated....unless people suddenly start buying up a whole lot more **** than they were buying before...but I don't think that consumer spending would go up that significantly.

I wouldn't be surprised if that 23% was the break-even percentage for the gubmint vs having an income tax. With the lower costs, producers could lower price, and would be able to sell more. This reduction in price could cause the gov't to get more money than they would be able to get before the tax reform. This also assumes the price changes how Ike proposed it. In this case, both the producer and consumer welfare increase in proportion to the decrease in price. Also, the decrease in dead-weight loss from a lowered tax would, in theory, increase spending and the government could get more money from the new policy.
If I knew how to draw graphs on a computer I'd show what (I think) most economists would say about this new policy.

[Ike]

So going back to my earlier point, at the rates proposed, the govt is slightly behind breaking even just on business taxes if consumer spending doesn't change. Meaning that all of the federal revenue from income taxes is being lost if there is no change in consumer spending. So in order to make that up, the government has to have faith that the mean increase in consumer spending is equivalent to about 4.5 times the current mean family tax burden. In other words, if Joe and Jane Average pay $5,000 yearly in federal income taxes under the current system, the Federal Government would need for them to spend an extra $20,000+ more than they would currently spend in order to break even. Now, they'll have that extra 5 grand to spend of the taxes that they get back, and they'll have their "rebate", which would be, by my reading, 23% of the federal poverty level. Lets say they don't have kids yet, which would by the HHS guidelines would be 23% of $13,690 = $3149, bringing their extra spending cash to $8149, which is less than half of the extra money that the feds would need them to spend in order for them to break even on Mr. and Mrs. Average. So where do they make up that money? But this rebate is coming straight out of the governments pockets, then, so it's really worse than that. The total amount the government would need each family to increase spending by would be equal to 4.5 times their current tax burden plus at least (assuming they spend all of that "rebate"), 77% of the amount paid out in rebate checks.

And lets not forget, that under this plan, there is no tax on second-hand goods. So for people for whom that rebate check would make all the difference, If they spend it all on used goods then that money is gone in the eyes of the government...perhaps through several iterations.

[mdklatt]

I wouldn't be surprised if that 23% was the break-even percentage for the gubmint vs having an income tax. With the lower costs, producers could lower price, and would be able to sell more.

Even if production costs go down by 20%, the consumer cost won't change very much because the sales tax will be a lot higher. As loathe as Americans are to pay taxes of any kind, I could see overall spending go down a lot as people tried to avoid this tax.

[SoonerBBall]

So if prices drop due to the ellimination of 20% hidden tax, and then go up by 23%, that actually makes the final cost of the item 98.4% of the original price of an item. (0.8*1.23=0.984)...in other words, prices would technically drop if this was the case.

This would seem to mean, from my point of view that the government would only bring in 98.4% of what they currently make in those hidden business taxes that were just eliminated....and 0% of the income taxes that were just eliminated....unless people suddenly start buying up a whole lot more **** than they were buying before...but I don't think that consumer spending would go up that significantly.
They aren't saying this at all.

I know I'm late to the discussion, but you really should buy and read The Fair Tax book. It is very good at describing all of this.

The theory is not to lessen the tax burden of the people one bit, it is to make it so that we have a choice to either spend or save at our discretion.

The 23% number was not pulled out of thin air, rather it was a number that took many economists years to come up with. It is the amount of sales tax that the government would have to collect in order to offset every other tax we pay. Because it is a percentage offset, and not an increase or decrease, this means that the price of goods with a 20% hidden cost would be about 3% higher. No offense to your well thought out math, but it isn't an set in stone number. It is a general guideline for about how much the tax should be for the federal government to take in the same amount of taxes as they have been.

*Edited last sentence for clarity.*

[mdklatt]

The theory is not to lessen the tax burden of the people one bit, it is to make it so that we have a choice to either spend or save at our discretion.


What happens if everybody starts saving?

[SoonerBBall]

What happens if everybody starts saving?

Credit card debt is ruining peoples lives just so they can keep up with the Jones', people buy a new car every other year no matter how upside-down they get on it, and to this day I see guys driving around with big chrome spinning wheels. Are you telling me that if people bring home more cash they are likely to save it? You live in America, the land built on (over)consumption and you are honestly asking that question?

[Ike]

They aren't saying this at all.

I know I'm late to the discussion, but you really should buy and read The Fair Tax book. It is very good at describing all of this.

The theory is not to lessen the tax burden of the people one bit, it is to make it so that we have a choice to either spend or save at our discretion.

The 23% number was not pulled out of thin air, rather it was a number that took many economists years to come up with. It is the amount of sales tax that the government would have to collect in order to offset every other tax we pay. Because it is a percentage offset, and not an increase or decrease, this means that the price of goods with a 20% hidden cost would be about 3% higher. No offense to your well thought out math, but it isn't an set in stone number. It is a general guideline for about how much the tax should be for the federal government to take in the same amount of taxes as they have been.

*Edited last sentence for clarity.*
No offense, but I generally do not trust economists when they make predictions. Mainly because they tend to suck at it. Not because they aren't smart, but because when dealing with things as complex as an economy the size of ours there are so many effects that it becomes excruciatingly difficult to measure these effects in the real world because its impossible to isolate them. If they could, we never would have recessions and mutual funds run by 2 nobel laureate economists would never fail. Economists deal with abstractions and even they aren't always entirely sure exactly how well their abstractions connect with reality.

Oh, and what you described makes no sense, mathematically. If something has 20% hidden cost (which I am assuming all goes to uncle sam because that's what they are leading me to believe), then eliminating that hidden cost and then applying a 23% tax on it decreases the price by 1.6%. If you want to increase the price to the consumer by 3% under such a scenario, that number would need to be 28.75%. And even then, IF, as I noted in my assumption, all of those hidden costs were going to uncle sam, they only make 103% of all of that hidden cost that they were getting anyway.


Unless the economists are using fuzzy math. Then it's all out the window.


<edit> So I read a bit, and it turns out that this 23% figure is actualy 23% of the gross payment. meaning that if you go to a store and pay $130 for new widget, then uncle sam gets $30 of that. by any current definition of "sales tax" thats a 30% tax, not 23%.

Further reading produced this gem from Bruce Bartlett, senior fellow for the National Center for Policy Analysis.
http://www.nationalreview.com/nrof_bartlett/bartlett200408090847.asp

When Congress’s Joint Committee on Taxation scored the Linder proposal four years ago it estimated that it would actually require a tax-inclusive rate of 36 percent, not 23 percent, to equal current federal revenues. Calculating the rate in a normal, tax-exclusive manner would mean a 57 percent rate.

In other words, even congresses own bookkeepers agree with me that this 23% number can't support the government without massive, sudden, growth of the economy, and that doesn't ever happen.

[tommieharris91]

What happens if everybody starts saving?

Without thinking much about it, I think it could cause a depression. No one saves money anymore anyway, which is almost as bad.

[1stTimeCaller]

For some reason when the Gov't comes up with something with the word 'Fair' in it, my first thought is 'I hope they lube me up first'.

[tommieharris91]

...my first thought is 'I hope they lube me up first'.

I have a feeling this is your first thought on a lot of things. ;)

[Ike]

For some reason when the Gov't comes up with something with the word 'Fair' in it, my first thought is 'I hope they lube me up first'.

at least "trickle down" economics had that "we're ****ing on you" honest feel to it.

[landrun]

<edit> So I read a bit, and it turns out that this 23% figure is actualy 23% of the gross payment. meaning that if you go to a store and pay $130 for new widget, then uncle sam gets $30 of that. by any current definition of "sales tax" thats a 30% tax, not 23%.



Pretty slick of you to notice that. I didn't.

When it comes to deceiving you in regards to taxes, tax figures and just how badly you're getting ripped off, the government is indeed very good. If they could apply their genius of creating new taxes to cutting the deficit and growing our econcomy our taxes would all be lower. :)

[Hamhock]

What happens if everybody starts saving?


Dave Ramsey smiles?

[landrun]

Here's a good article on money.cnn discussing the other side of this issue.

http://money.cnn.com/2005/09/06/pf/taxes/consumptiontax_0510/index.htm

They claim that we would all suffer a pay cut. :eek: So, you would take 100% of your smaller check home. Is that truth? I don't know.




...
Toward the end of The FairTax Book, there's a handy little box summarizing what the authors say will happen if we make the switch to a sales tax. Here are the first three points:

* We start collecting 100 percent of our earnings in every paycheck.

* We all get virtual raises, since payroll taxes are no longer siphoned

From our checks.

* We all start receiving monthly prebates equal to the amount of

Consumption tax we would be expected to pay on life's basic necessities.

This sounds pretty good. Of course, we know that it isn't nearly as big a gift as it seems because we'll have to pay some of it back in taxes when we buy things at the store, right? Er, apparently not. Boortz and Linder write:

* The prices of consumer goods and services remain essentially the same, with the removal of embedded taxes compensating for the added consumption tax.

We'll explain this bit about "embedded taxes" in a moment. But first, let's consider what Boortz and Linder appear to be saying. Prices at the store are the same. Your boss stops taking all that money out of your paycheck. Uncle Sam is sending you money instead. And, oh yeah, the government is still up and running.

This just can't happen. "It is practically and logically impossible for the government be collecting the same amount of money as before and have everyone suddenly be better off," says Daniel Shaviro, a tax law professor at New York University.

Part of the problem is the way Boortz and Linder are using the idea of embedded taxes. In an eight-year-old study paid for by AFFT, Harvard economist Dale Jorgenson noted that because the taxes paid by everyone in the chain of production are embedded in the cost of goods, prices could decline an average of 20 percent if all those taxes were scrapped. The FairTax Book devotes an entire chapter to this idea.

What The FairTax Book fails to mention is that prices can only fall this sharply if companies cut wages. I asked Jorgenson about this, and he agreed.


My own little note here. ;)
I have my doubts that the authors of the book just said, "yes. yes that is correct. we agree." The press is so dishonest I question the truth of this statement. But, their argument is that they obviously think we'd get a pay cut. They may be right too. But I've read fair tax people who say we'd get a raise and receive the FICA tax we pay before taxes which is rightfully ours. So here is an issue where one group says, you take a pay cut and the other says, you could get a pay increase.



Say your salary is $100,000 a year today, but you take home $80,000 after taxes.

Your company is still paying that extra $20,000. In a FairTax world, it will save that money, and be able to lower its prices accordingly, only if it can reduce your salary to $80,000. In other words, your take-home pay is the same as before. Sure, you'd get to "keep 100 percent of your paycheck," as Boortz and Linder repeatedly write, but it would be a smaller paycheck. That's kind of a big thing to leave out.

I pressed the point with Boortz and Linder. Boortz denies that the book intentionally overpromises. The introduction, he notes, emphasizes that "this book isn't about saving a penny in taxes." But he concedes that the book is confusing about this, and vows to correct it in later printings. Fair enough.

Meanwhile, these guys want to replace the entire tax code, they've ignited a populist movement to get it done, and tens of thousands of copies of the uncorrected book make the FairTax sound like magic.
...

[85Sooner]

Overall,

1. you keep 100% of your paycheck no taxes are taken out.
2. Products will be priced 21% lower due to the fact that taxes will not be part of the Inherent costs of products.

3. a 23% sales tax will be charged to each product. Prices of products will be 2% higher than they are now. Then $1.00--Now $1.02

Those low income groups will recieve refunds each month (much like the gov checks they already get)


I have been supporting this bill for 5 years now. CALL YOUR CONGRESS PERSON NOW!!!!!!!!!!!!!!!!!

[85Sooner]

Toward the end of The FairTax Book, there's a handy little box summarizing what the authors say will happen if we make the switch to a sales tax. Here are the first three points:

* We start collecting 100 percent of our earnings in every paycheck.

* We all get virtual raises, since payroll taxes are no longer siphoned

From our checks.

* We all start receiving monthly prebates equal to the amount of

Consumption tax we would be expected to pay on life's basic necessities.

This sounds pretty good. Of course, we know that it isn't nearly as big a gift as it seems because we'll have to pay some of it back in taxes when we buy things at the store, right? Er, apparently not. Boortz and Linder write:

* The prices of consumer goods and services remain essentially the same, with the removal of embedded taxes compensating for the added consumption tax.

We'll explain this bit about "embedded taxes" in a moment. But first, let's consider what Boortz and Linder appear to be saying. Prices at the store are the same. Your boss stops taking all that money out of your paycheck. Uncle Sam is sending you money instead. And, oh yeah, the government is still up and running.

This just can't happen. "It is practically and logically impossible for the government be collecting the same amount of money as before and have everyone suddenly be better off," says Daniel Shaviro, a tax law professor at New York University.

Part of the problem is the way Boortz and Linder are using the idea of embedded taxes. In an eight-year-old study paid for by AFFT, Harvard economist Dale Jorgenson noted that because the taxes paid by everyone in the chain of production are embedded in the cost of goods, prices could decline an average of 20 percent if all those taxes were scrapped. The FairTax Book devotes an entire chapter to this idea.

What The FairTax Book fails to mention is that prices can only fall this sharply if companies cut wages. I asked Jorgenson about this, and he agreed.


Jorgenson uses CNN logic which is exactly the opposite of common sense logic.
1. Employers would save the half of your taxes that you never see. (remember iit is still a cost to emply you.)
Costs are costs- if imbedded taxes are no longer an issue the marketplace will keep the prices down.

[1stTimeCaller]

I really don't have a problem with our current tax system.

Where do all of these CPAs go work with this new tax system? Do they get to keep their jobs?

[SoonerBBall]

I really don't have a problem with our current tax system.

Where do all of these CPAs go work with this new tax system? Do they get to keep their jobs?

CPAs are part of the embedded cost of our current ridiculous tax system. Accountants in general are only required because how large and obtuse the current tax code remains.

Ike, I'll respond to your post later, but I have work. It is coming, though.

[Hamhock]

I really don't have a problem with our current tax system.

Where do all of these CPAs go work with this new tax system? Do they get to keep their jobs?

congress' brilliant Sarbanes-Oxley creation has created enough jobs for every CPA on the planet.

[Okla-homey]

Me likey, but...and there's always a "but" in a democracy.

I submit that the tax bar, CPA lobby and tax preparer industry would fight such a proposal most vociferously -- not to mention the the various trade unions which represent fed and state workers, many of whom are employed by the IRS and various related state agencies -- which which would roll the AFL-CIO into the fray opposing such legislation.

Ergo. Nottachance.

[Hamhock]

Me likey, but...and there's always a "but" in a democracy.

I submit that the tax bar, CPA lobby and tax preparer industry would fight such a proposal most vociferously -- not to mention the the various trade unions which represent fed and state workers, many of whom are employed by the IRS and various related state agencies -- which which would roll the AFL-CIO into the fray opposing such legislation.

Ergo. Nottachance.

great point.

imo, you're missing the biggest opponents.

what about all those people on Schedule A - Itemized Deductions??

namely...the people receiving my mortgage interest and charitable contribution??

i submit that the philanthropy of many u.s. citizens will be tested when there is no tax benefit.

[mdklatt]

i submit that the philanthropy of many u.s. citizens will be tested when there is no tax benefit.

Since donations are deducted from your taxable income and not the tax you owe I don't see why it would make much of a difference.

[Hamhock]

Since donations are deducted from your taxable income and not the tax you owe I don't see why it would make much of a difference.


i guess i understood from the discussion that the whole conept of taxable income and the 1040 goes away.

right now if i give $1.00 to charity it reduces the tax i pay. if there is no income tax system, the financial benefit of giving to a charity goes away.

i must have misunderstood something...

[mdklatt]

right now if i give $1.00 to charity it reduces the tax i pay. if there is no income tax system, the financial benefit of giving to a charity goes away.


But it only reduces the tax you pay by a fraction of $1. How is that a benefit? You're still going to end up with less money than you had before.

[Hamhock]

true. the current tax rate is not 100%, but today, giving $1 only costs $.70. after a flat-tax, giving $1 costs $1

i know plenty of people that, when weighing charitable giving, are persuaded by the tax deductibility of the gift. why do you think organizations fight so hard to keep their tax exempt status?

your argument doesn't apply to mortgage. many people buy a house with a $1,000 mortgage vs. paying $1,000 in rent because of the deductibility of the interest.

[Vaevictis]

CPAs are part of the embedded cost of our current ridiculous tax system. Accountants in general are only required because how large and obtuse the current tax code remains.

You do realize that not every accountant is a tax accountant, right?

[Hamhock]

You do realize that not every accountant is a tax accountant, right?


he just understands that every accountant wishes they were a tax accountant :texan:

[Vaevictis]

he just understands that every accountant wishes they were a tax accountant :texan:

Pfft, any accountant that wants to be a tax accountant can just go get a job at H&R Block.

Managerial or audit is a better career path for an accountant.

[Hamhock]

Pfft, any accountant that wants to be a tax accountant can just go get a job at H&R Block.

Managerial or audit is a better career path for an accountant.


i actually agree with you. as you progress in a tax career, you tend to pigeon-hole yourself. most clients, for some reason, think the auditors are waaay smarter than they are. those are the guys that get the cfo positions in the major corps, not the tax dork that can calculate the foreign tax credit on the corps 32 int'l subs...

[Vaevictis]

Well, any auditor worth his salt is way smarter than they are ;) Of course, not every auditor is worth his salt.

[swardboy]

Have you 'uns ever looked at how much of your money is taken away from every paycheck? If you ever got ALL that money for a couple of pay periods you'd be up in arms over how you're getting jobbed. Why do we passively let the government tax us twice: Income and sales tax? Sheep belong in stoolwater.

And anything that puts IRS agents in the unemployment line is a GOOD thing. I'd spit on them while passing by.....

[Mjcpr]

Why do we passively let the government tax us twice: Income and sales tax?
One funds federal and one funds local government(s).

[Vaevictis]

Have you 'uns ever looked at how much of your money is taken away from every paycheck? If you ever got ALL that money for a couple of pay periods you'd be up in arms over how you're getting jobbed.

I've looked. I also know how much my employers are paying on the payroll tax side of things. I've cut large dollar checks to the IRS for capital gains, too.

What bothers me is not how much they take out -- that amount is reasonable when it's compared to say, how much my grandfather paid in taxes, or when you compare the state of our country to other countries that have much lower taxes (almost invariably ****holes, or so small that it would be unsustainable in a country our size).

No, what bothers me is how they spend it.

[swardboy]

I've looked. I also know how much my employers are paying on the payroll tax side of things. I've cut large dollar checks to the IRS for capital gains, too.

What bothers me is not how much they take out -- that amount is reasonable when it's compared to say, how much my grandfather paid in taxes, or when you compare the state of our country to other countries that have much lower taxes (almost invariably ****holes, or so small that it would be unsustainable in a country our size).

No, what bothers me is how they spend it.

And that's a major problem because of how we do taxes now. Legislators create their little fiefdoms based on tax laws. The Fair Tax does more to remedy that than any other plan I know of.

[Vaevictis]

If that's the case, then what we call the "Fair Tax Law" would be better known as "stillborn."

[OklahomaTuba]

Would this tax apply to stock purchases?

[Ike]

So here's another thing I wonder. Would your support of such a law change if the rate were different? What if it was 50%. 80%? Also, it's common for states to increase sales taxes on products they don't like. Like cigarettes. Or porn. I assume that congress would want to have that same kind of power. Who's to say that they don't just jack up the taxes on things they don't like, like alcohol or firearms or ammunition?

I know I get nitpicky, but to be honest when you talk about changing something as drastically as this would, it's extremely important to read all of the fine print, because thats where they stick the part about them bending you over.

[AggieTool]

Any tax the DOESN'T penalize hard work and success, I'm for.

[Ike]

Any tax the DOESN'T penalize hard work and success, I'm for.

all taxes "penalize" hard work and success.

[landrun]

So here's another thing I wonder. Would your support of such a law change if the rate were different? What if it was 50%. 80%? Also, it's common for states to increase sales taxes on products they don't like. Like cigarettes. Or porn. I assume that congress would want to have that same kind of power. Who's to say that they don't just jack up the taxes on things they don't like, like alcohol or firearms or ammunition?

I know I get nitpicky, but to be honest when you talk about changing something as drastically as this would, it's extremely important to read all of the fine print, because thats where they stick the part about them bending you over.

Very very true.

And I would NOT support the tax if the rate went higher. And the more I think about it, the less I understand the tax credit. Why give EVERYONE a tax credit? Just lower the rate of the tax.

[landrun]

Anyone know if this law would apply to houses and automobiles?

You don't pay a federal tax on a car today. Just a state tax. And you pay property taxes not a sales tax when you buy a home. I would guess this law would not apply to housing and vehicles.

I would certainly hope not. Think about buying a $100,000 home. Normally people try to get pretty much as much as they can afford. If this law applies to houses, you will immediately owe the government $23,000. That WOULD negatively effect the poor - but not the rich. And I could see mortgage companies screwing the home owners by financing this tax into the mortgage.

If this bill applies to houses and vehicles. I no longer have to decide. I'm 100% against it.

And yes. My wife and I have recently acquired the new home fever. :)
I'm going to get one of those really cool adjustable rate, interest only loans where you can't sell before 3 years without paying a heavy penalty and the loan balloons in 2 years.

.
.
.
.
.
.

KIDDING! :D

[Scott D]

You're ignoring the efficiency effects of being able to seriously cut back on IRS enforcement, collection, and auditing staff.

But yeah.

it's the IRS, there's nothing efficient in anything they do. Otherwise independent auditors wouldn't find mass discrepancies in their financial records.

[NYSooner1355]

yeah, this would really hurt lower income folks.......it would make major purchases difficult and alot of them rely on that refund they get every year

what are you classifying as "major purchases"? because when I see/hear that term I'm thinking of unnecessary high ticket items - in which case a low income household probably can do without...

that is one of the major problems with the current tax system, individuals relying on a perceived "gift" back from the government in the form of a tax refund...when it was their money in the first place - and no, I'm not completely anti-tax - just wish they would implement a tax system that wasn't so burdensome on the middle class and so convoluted in it's setup...

[NYSooner1355]

One funds federal and one funds local government(s).

ummm, have you ever heard of "Federal, State and Local" taxes? in many cases you are getting income taxed for Fed State Local purposes and sales taxed for State and Local purposes